Fixed Maturity Plans

Prologue: 

Fixed Maturity Plans are close-ended debt schemes with a maturity horizon varying from one month to five years. They are launched with

predetermined maturity date; so as the investments are made in such securities which mature at or around the same time as the schemes do. Investors

are not allowed for premature redemption during period and are warranted to stay till maturity. However, premature withdrawals are allowed on the stock exchanges where these units are listed and traded at market prices. However this route is not yet very liquid. The schemes are shut down generally once they get matured.

In a rising interest rate scenario, FMPs are seen as best investment tools. They are better investment options than bank fixed deposits (FD) as they offer higher after tax returns with minimal extra risk.

Structure: 

The objective of FMPs is to generate steady returns over a fixed period and safeguarding the investor against market fluctuations. They

invest in Government securities, corporate debts and money market instruments. They invest in those instruments that get matured at or around the

same time as their schemes. Given the structure, it is implied that the returns are always in positive terrain if held till maturity.

Even though the schemes are listed & traded in stock exchanges, liquidity is currently limited as their prices trade at a huge discount to their NAVs. It is best suited for the investors who are comfortable locking in their investment until maturity. FMP's NFOs are generally opened for one to three days and minimum investment amount is set at Rs. 5,000.

The difference in returns that are yielded by two different FMPs, having same tenure, arises out of the risk taken on in the portfolio by the fund

managers. The one which invests in higher rated debt instruments would yield lesser return compared to another with lower rated (risky) debt

instruments.

Industry regulators have taken ample measures to promote such products as an efficient investment tool and to protect the investors from any

misleading. It is noteworthy to say that the SEBI strictly instructed all the fund houses to stop selling fixed maturity plans on the basis of indicative returns as such practice is unethical and boils down to guaranteeing returns. SEBI has also stopped fund houses from giving an exit option. Earlier, an investor had the option to redeem FMP units to the mutual fund house before maturity by paying an exit load of 2% of the net asset value.

Tax Treatment: 

FMPs are tax-efficient. They are subject to capital gains tax and dividend distribution tax. The tax treatment depends on the choosing of investment options such as growth or dividend. In Dividend option, investors have to bear dividend distribution tax, whereas in the Growth option returns earned are treated as capital gains (short-term or long-term depending on tenure of investment).

Dividend option is best suited for investors who fall under higher tax bracket (if the investment horizon is less than a year). Though the dividend received is tax free in the hands of investors, a Dividend Distribution Tax (DDT) of 14.165% is levied by the mutual funds and deducted from investors' proceeds before pay out.

An investor in an FMP with tenure of over a year who opts growth option to take gains as capital appreciation will attract a tax rate of 10% or 20%

(depending on whether or not indexation is applicable). As against this, interest on bank's Fixed Deposit of similar tenure might be taxed at 30%. In case of short-term capital tax, it is similar to interest income from bank fixed deposits. The returns are added to the income of the investor and taxed as per his/her slab. FMPs of longer-term maturities spanning over more than two financial years also offer better tax efficiency through double indexation benefits. For instance, if you buy an FMP of 14 months in February 2010, scheme will mature in April, 2011. In this case, the investor will get inflation indexation benefits for the years 2009-10 and 2011-12.

Indexation benefit: 

Inflation erodes the real value of any investment. So every year, an inflation index based on the prevailing rate of inflation is

announced. The cost of investment is indexed by multiplying the index of the year of maturity and divided by the inflation index prevailing in the year of

investment. If you have arrived at an indexed cost, then the long-term capital gain is taxed at 22.66% and if you do not opt for the indexed cost, then the tax is 11.33% of the gains.

Conclusion: 

FMPs and interval schemes are tax-efficient and yield favorable returns. However, they offer no guaranteed returns (unlike fixed deposits)

and ample liquidity. Given the present credit market tightness, fund houses launch more FMPs and interval schemes. Investing in short term FMPs is

advisable at this point of time. They can be an excellent investment for investors who clearly understand the risks associated with them.

Current FMP NFOs:

Scheme Name Open Date Close Date Tenure Minimum Investment Amount (Rs.)

Axis FTP 12(G) 03-Feb-2011 08-Feb-2011 367 Days 5,000.00

Birla SL FTP-CO(G) 07-Feb-2011 08-Feb-2011 366 Days 5,000.00

DSPBR FMP 12M-14-(G) 08-Feb-2011 08-Feb-2011 12 Months 10,000.00

DWS Hybrid FTF- Series 2(G) 27-Jan-2011 10-Feb-2011 3 Years 5,000.00

ICICI Pru FMP-55 -14M-A(G) 07-Feb-2011 17-Feb-2011 14 Months 5,000.00

ICICI Pru FMP-55-1Y-B(G) 03-Feb-2011 10-Feb-2011 1 Year 5,000.00

ICICI Pru FMP-55-6M-A(G) 02-Feb-2011 11-Feb-2011 6 Months 5,000.00

IDFC FMP-16M-3(G) 04-Feb-2011 14-Feb-2011 16 Months 10,000.00

IDFC FMP-YS-37-(G) 04-Feb-2011 09-Feb-2011 1 Year 10,000.00

IDFC FMP-YS-38-(G) 11-Feb-2011 17-Feb-2011 1 Year 10,000.00

Kotak FMP 34(G) 03-Feb-2011 08-Feb-2011 370 Days 5,000.00

L&T FMP -III-(Jan 369D )-A(G) 31-Jan-2011 09-Feb-2011 369 Days 5,000.00

Principal PNB FMP 91D-XXVIII(G) 04-Feb-2011 09-Feb-2011 91 Days 5,000.00

Religare FMP-V-D-13M(G) 10-Feb-2011 17-Feb-2011 13 Months 5,000.00

SBI DFS 180D-15(G) 04-Feb-2011 08-Feb-2011 180 Days 5,000.00